The US bond fund PIMCO has warned that Britain risks a vicious circle of
rising debt costs as global investors demand a penalty fee on gilts to
protect against inflation.

Bill Gross, the fund's chief and emminence grise of bond vigilantes, said the UK was on its list of "must avoid" countries along with Greece and others in eurozone's Club Med.

The flood of British debt is likely to "lead to inflationary conditions and a depreciating currency", lowering the return on bonds. "If that view becomes consensus, then at some point the UK may fail to attain escape velocity from its debt trap," he wrote in his April monthly note.

Mr Gross said the UK is not yet in crisis but giltsare sitting on a "bed of nitroglycerine" and must be handled delicately. Spreads on 10-year gilts have crept up to 14 basis points above those of Spain, itself in some difficulty.

Professor Carmen Reinhart, an expert on sovereign defaults at Maryland University and author of This Time is Different: Eight Centuries of Financial Folly, said Britain's trump card is a debt maturity of over fourteen years, much higher than the US or the big eurozone states. This greatly reduces roll-over risk or the danger of a "sudden death" crisis in the event of a shock.

"What we found in our research is that countries nearing default start to rely on ever shorter debt maturities and issue more bonds in foreign currencies. The UK has done neither," she said.

"Britain may need a scare to force the politicians to act, just like the Canadians in the early 1990s when they started to trade like an emerging market. The lesson in these cases is that the sooner it happens the better. The risk for America is that their status as holder of the world's reserve currency will let them delay," she said.

However, there are risks that Britain will have trouble finding creditors to finance a deficit of 12pc of GDP now that the Bank of England has halted quantitative easing. The Bank has soaked up £200bn of gilts, more than the Treasury's total debt issuance over the last year.

Michael Saunders from Citigroup said the UK has "no credible medium-term path back to fiscal sustainability". Little is being done to confront the "cuckoo in the nest": the 28pc of public spending going to welfare payments. He said inflation may spike to 4pc this year, leaving gilts nakedly exposed.

Spyros Andreopoulos from Morgan Stanley said Britain's long-term debt maturities paradoxically create a "greater temptation to inflate" since it is harder for bond vigilantes to punish the country. He said the risk will rise once the budget deficit comes back under control and there is less new debt to finance, arguably in two to three years.

For now, Greece remains the immediate worry. Last week's deal by Europe's leaders to create a joint IMF-EU support facility has failed to restore confidence, largely because there is no clear trigger and because it does not offer the long-term cheap financing that Greece needs to recover.

Yields on 10-year Greek bonds have risen to 340 basis points over Bunds, leaving investors who took up a €5bn (£4.4bn) issue on Monday with a big capital loss. A €1bn snap auction on Tuesday made matters worse, yielding under €400m. Greece's Public Debt Management Agency said the country needs to raise a further €32bn this year, including €11.6bn by late May.